In a drop-shipping transaction, a retailer sells an item to a customer, but the order is fulfilled and shipped by a third party. In general, how taxes are assessed on these transactions depends on which company (the retailer or the shipper) has nexus in the state to which the product is shipped.
Before sending transaction information to AvaTax Update, you need to know where tax is collected in the drop-shipping process. Because of how complicated drop-shipping transactions can be, Avalara recommends first consulting a tax professional, like a CPA or tax attorney, or your state’s Department of Revenue.
To set up a drop-shipping transaction in your accounting system:
- Under Document-level address, enter the shipping or billing location. Typically, this is the address shown on your invoice.
- Under Line-level address, enter the address where tax is required. This is the address where your company is obligated to collect tax, and it overrides the document-level address.
- If your accounting system doesn’t support line-level addresses, import your transactions into AvaTax Update.
If the drop shipper is a reseller, add an exemption in your accounting software. This could be:
For more information, see Who You Exempt.